There's No Place Like Homebuilders

 | Jul 10, 2014 | 4:00 PM EDT
  • Comment
  • Print Print
  • Print
Stock quotes in this article:








Wednesday, after market hours, Lumber Liquidators (LL) announced second-quarter same-store sales fell by 7.1%, and it significantly lowered its full-year 2014 profit forecast. Unsurprisingly, the stock has been hammered. In Thursday trading, the stock was recently down more than 20%. When I see movement like that, I look for opportunity. Unfortunately, I cannot find one in LL -- but that doesn't mean there isn't one at all.

I can't see an opportunity in the stock of Lumber Liquidators because the big drop is now over and looks entirely justified. The stock is not worth selling now, nor does it represent an obvious contrarian buy. There is an opportunity, though, and it lies in the other stocks that being dragged down with it, specifically, among the homebuilders.

The disappointing news from the home-improvement supplier tells us something about that particular business, and suggests that Tuesday's comments from The Container Store (TCS) CEO William "Kip" Tindell about a general "retail funk" may be accurate. I find it hard to reconcile a general consumer malaise with improvement in the employment picture, so I am inclined to conclude that both companies' dismal outlooks represent a downturn in home improvement specifically. Even if I am wrong about that, we at least know that people are spending less in that particular area. What baffles me is why that has led to a drop in the stocks of homebuilders.

Back when the new home market was stagnant, Lumber Liquidators and other home improvement stores were all the rage. If people couldn't or wouldn't move, went the logic, they would spend money on renovations and improvements. That made perfect sense and worked out well. What I can't work out now, though, is why the reverse wouldn't be true.

This morning I am hearing that the homebuilders are down, partly in reaction to the LL news. If that news, taken with TCS's downward revision, indicates lower spending on improvements, couldn't that mean that more people are considering actually moving? Of course, it isn't that simple; LL also supplies builders, so their woes could be, at least in part, the result of a slowdown in actual construction. Two consecutive months of seven-figure housing starts, however, would suggest otherwise, as would strong Q2 results from KB Home (KBH) and Lennar (LEN) a couple of weeks ago.

As you can see from the charts below, both KB and LEN have pulled back after positive reactions to their earnings numbers. Both look like a decent buy at these levels to me. Forward price-to-earnings ratios of 11.7 (KBH) and 12.5 (LEN) would suggest that, if nothing else, neither stock is particularly expensive.

Source: Nasdaq

When news surfaces and companies report earnings or change guidance, there is nearly always an opportunity created. Often, as in this case, that opportunity is somewhere other than where you might first look. Far from being a negative for homebuilders, a case can be made that slowing home improvement purchases are actually a positive. Whether you believe that or not, both KB Home and Lennar look cheap after the recent drops.

Columnist Conversations

we like this chart here, it appears ready to move higher. BOUGHT BZUN OCT 35 CALL AT 3.40
Large-cap, high-quality McKesson (MCK) is too cheap now, at $147.51 or so. The stock hit $243.60 more than 2.5...
View Chart »  View in New Window » View Chart » 
Hug declines in Advance Auto Parts (AAP) and Dick's Sporting Goods (DKS) made for great chances to buy stock a...



News Breaks

Powered by


Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.